Use the following table to answer the questions below: A. Calculate the short ra
ID: 2768823 • Letter: U
Question
Use the following table to answer the questions below:
A. Calculate the short rates r1, r2, r3 and r4.
B. Suppose an agent buys bonds B, C and D, holds them for one year and then sells them all. Find the price the agent will be able to sell each of the three bonds at.
C. Based on the prices you found in C., write expressions for the Holding Period Returns of bonds B, C and D and observe that the Holding Period Returns are the same.
Bond Par Value Years to Maturity Yield to Maturity Coupon Rate $1000 $1000 $1000 D$1000 0% 0% 0% 0% 296 1% 9%Explanation / Answer
A)r1=2%
r2=(1.04^2/1.02)-1=6.0392%
r3=(1.07^3/1.04^2)-1=13.2621%
r4=(1.09^4/1.07^3)-1=15.2271%
B.
Purchase price of B=1000/1.04^2=924.556
Purchase price of C=1000/1.07^3=816.2979
Purchase price of D=1000/1.09^4=708.425
Selling Price of B=1000/(1.060392)=943.04748
Selling Price of C=1000/((1.060392)*(1.132621))=832.6240
Selling Price of D=1000/((1.060392)*(1.132621)*(1.152271))= 722.59394
C.
Holding Period Return B=(943.04748-924.556)/924.556 = 2%
Holding Period Return C=(832.6240-816.2979)/816.2979= 2%
Holding Period Return D=(722.59394-708.425)/708.425= 2%
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